Options to avoid on-going penalty - Excess Roth IRA contributions - Amended 2021 return in 2023

Forum|Forum|3 years ago
January 27, 2023
13 replies
80 views

Greetings - A new Roth IRA was funded in April 2022 for prior year 2021.

Unfortunately the deadline to process a 2021 Return of Excess Contribution was October 17th, 2022.

What alternative distribution options are available to me to avoid ongoing penalty for 2022, 2023 and later ?

Background :

As I was preparing to file on April 15th Turbo Tax warned of excess contribution so I requested extension of had subsequently requested the trustee to execute a refund of the excess amount. Subsequently I filed the return before Oct 2022 without any penalties.

Unfortunately, On Dec 30th 2022, I received a W2C - with some additional income due to employers error. I filed a 2021 Amendment this year Jan 2023. Turbo Tax reported an excess contribution due to this minor increase in income that was subject to 6% penalty for 2021 and also generated the form 5329.

As of Jan 26, 2023 I have not yet received the 1099-R for the excess 2021 Roth contribution refund taken out in 2022.

Thank you !

TurboTax Home & Biz Windows

Best answer by ThomasM125

To avoid a penalty going forward you need to withdraw the excess contribution. You can do this by taking a distribution from the pension plan for the amount of the excess contribution, or you can simply not make allowable contributions in the current or future years up to the amount of the excess contribution. For instance, if your excess contribution is $7,000 and you are allowed to make $7,000 in contributions for 2022, you can simply not make those contributions and you will have paid back your excess.

ThomasM125Answer

Level 15

**Say "Thanks" by clicking the thumb icon in a post. **Mark the post that answers your question by clicking on "Mark as Best Answer"

coolcarn1samAuthor

Level 3

Thanks @ThomasM125 -

As Unfortunately allowable contributions this year are too less.

I will have to take the distribution of the 2021 carry forward excess contribution as "Early Distribution - No Exceptions - I'm under the age of 591/2 with no known exceptions" - Correct ?

Besides this years 6% penalty on form 5329 on 2022 return - Will the 10% penalty on the withdrawn amount be payable on 2023 return ?

Besides filing 5329 with 2022 return what else needs to be done to avoid having to amend 2022 return in future ?

Regards

MichaelG81

Level 7

What the other expert explained is what's called an "absorption" where you if you put less this year, it'll absorb your excess up to your maximum contribution rate this year from last year excess. But if any excess remains after the absorption for the year and your maximum, you will still be charged a 6% penalty on the excess for next year, a lower amount do to the absorption. Here's some information about reporting requirements from a previous answer, answered last year; but same concept. A code of P and J might apply to this withdrawal on your 1099-R.

It depends, if no known exception applies, you will be taxed 10% early withdrawal. Here's information from the IRS website about additional taxes on contributions and exceptions to the 10% tax. If you withdrew in 2023, you will receive a form in early 2024, for 2023 tax return.

Just report what you've done for your 2022 year. Also, with this withdrawal you have 2 options:

You can wait until you receive the 1099-R 2023 in 2024 and amend your 2022 return or
You can report it now in your 2022 return and ignore the 1099-R when it comes unless there is Box 4 Federal Tax withholding and/or Box 14 State withholding. Then you must enter the 2023 1099-R into the 2023 tax return since the withholding is reported in the year that the tax was withheld. The 2023 code P will not do anything in 2022 tax return but the withholding will be applied to 2023.

@coolcarn1sam

**Say "Thanks" by clicking the thumb icon in a post. **Mark the post that answers your question by clicking on "Mark as Best Answer"